Sometimes they may indeed engage in insider trading that is too difficult for authorities charged with enforcing insider trading law (mostly the SEC in the U.S.) to prove.
But, trading on "material non-public information" isn't itself a crime. It is only insider trading when the material non-public information comes from an "insider". Historically, liability was limited to the insider themselves, although this has been expanded to a limited and not entirely well defined degree. Lots of material non-public information doesn't come from an insider, and is legal as a result.
As explained here:
Insider trading is the trading of a company’s securities by
individuals with access to confidential or material non-public
information about the company. Taking advantage of this privileged
access is considered a breach of the individual’s fiduciary duty.
A company is required to report trading by corporate officers,
directors, or other company members with significant access to
privileged information to the Securities and Exchange Commission
(SEC). Federal law defines an “insider” as a company’s officers,
directors, or someone in control of at least 10% of a company’s equity
securities. Congress has criminalized these insiders’ use of
non-public information under the theory that the use fraudulently
violates a fiduciary duty with which the company has charged the
insider.
Courts impose liability for insider trading with Rule 10b-5 under the
classical theory of insider trading and, since U.S. v. O’Hagan, 521
U.S. 642 (1997) , under the misappropriation theory of insider trading
.
Under the classical theory of insider trading, insiders who “tip”
friends about material non-public information which may influence the
company’s publicly traded stock price may be liable. Because friends
do not satisfy the definition of an insider, a problem arose regarding
how to prosecute these individuals. Today, a friend who receives
such a tip has the same duty as the insider imputed onto them. In
other words, a friend may not make a trade based upon that privileged
information. Failure to abide by the duty constitutes insider trading
and creates grounds for liability. The person receiving the tip,
however, must have known or should have known that the information was
company property to be convicted.
Dirks v. SEC , 463 U.S. 646 (1983) was a pivotal U.S. Supreme Court decision regarding this type of insider trading. In Dirks, the
Court held that a prosecutor could charge tip recipients with insider
trading liability if the recipient had reason to believe that the
information’s disclosure violated another’s fiduciary duty and if the
recipient personally gained from acting upon the information. Dirks
also created the constructive insider rule, which treats individuals
working with a corporation on a professional basis as insiders if they
come into contact with non-public information.
The emergence of the misappropriation theory of insider trading in
O’Hagan has paved the way for passage of 17 CFR 240.10b5-1, which permits criminal liability for an individual who trades on any
stock based upon the misappropriated information. Previously,
the prosecutor could only charge the insider if the stock of the
insider’s company had been traded. While proof of insider trading can
be difficult, the SEC actively monitors trading, looking for
suspicious activity. Under Rule 10b5-1, however, a defendant can
assert an affirmative preplanned trade defense.
How far insider trading liability reaches when the people who receive it are neither insiders themselves, nor friends of insiders, is hard to know. Not everyone in a company and not everyone who works for a company, especially if that person is not subject to a non-disclosure agreement (NDA), is necessarily an insider, whose tips, if traded upon, give rise to liability.
Also, insider information that is not itself material, can provide a basis for trading, if it corroborates non-insider information, or other information that in isolation isn't material, even if it provides a basis for trading when combined in a total picture.
For example, closely monitoring the shopping habits or vacation plans of insiders could be used to predict the health of the companies with which insiders are affiliated, even though the shopping habits themselves are not material information about the company.
Similarly, interviewing rank and file truck drivers about their schedules of deliveries in the near future from a company probably doesn't count as material non-public information obtained from an insider. But compiling that information could be used to predict major shifts in the amount of sales that a company anticipates that it will have from a deal that has not been announced, or in its next round of financial reports.
Profitable trading doesn't require complete accuracy or precision in the information obtained. As long as the information obtained is better than the information that the rest of the market is trading upon and is correct more often than not, it is good enough.
